by Brianna Crandall — May 9, 2012—Prime European office rents fell by 0.3% in the first quarter (Q1) of 2012, according to the European Office Rental Index just released by Jones Lang LaSalle, a global financial and professional services firm specializing in real estate services and investment management. This is the first overall recorded reduction in rents since Q4 2009, says the firm.
The net reduction masked both rises and falls across several prime office rental markets. Falls were recorded in Brussels (-5.0%), Madrid (-1.9%), Barcelona (-1.4%) and Paris (-1.2%), while rental increases were recorded in Luxembourg (+5.3%), Stockholm (+2.4%) and Hamburg (+2.1%).
In the wake of the adjusted economic outlook for the region as a whole, growth forecasts for 2012 have been revised downwards. Markets with more robust economic conditions such as the U.K. and Germany are likely to perform well, while struggling economies such as Greece, Portugal, Spain and Italy are expected to see ongoing strains in occupational markets and rents.
The Jones Lang LaSalle “office clock” shows the spread between markets across the region, with the first market (Amsterdam) reaching 12 o’clock, indicating its next move will be rental reductions, whereas 14 markets still remain at or before 6 o’clock, indicating that rents are still to bottom out or stabilize.
According to Jones Lang LaSalle, office occupiers are expected to remain cautious in the short term, and current expectations are for leasing volumes over 2012 to be slightly lower than 2011—but in line with long-term averages. Take-up in Q1 2012 totaled 2.3 million sq m, 15% below Q1 2011, with leasing volumes in Germany decreasing from the high levels of last year and an 18% reduction in Paris.
Annual net absorption, representing the change in occupied stock, totaled 3.1 million sq m, which is 16% lower than in Q1 2011. Levels in Western Europe increased, driven by strong performance in the German markets, whereas absorption slowed in the Central and Eastern Europe (CEE) region.
The European vacancy rate remains unchanged at 9.9% over the quarter, with stable aggregated vacancy in Western Europe but increasing vacancy in CEE markets driven by occupiers releasing secondhand space back into the market. Budapest showed the highest increase with an increase of +110bps to 20.3%.
“Vacancy levels will decline slowly on aggregate throughout 2012,” said Bill Page, Director, EMEA Offices Research at Jones Lang LaSalle. “This will be supported due to the very low volume of new space being added to the markets. In the first quarter of this year, only around 600,000 sq m of office space completed in Europe, which is yet another record low and 54% below the five year average. The development response that would usually be expected to this is expected to be sluggish as the availability of finance remains low. In addition many projects currently developed on a speculative basis could face postponement or cancellation, while stock coming on the market is often already pre-let.”
Office transactions accounted for almost €13 billion of the Q1 2012 volumes (€21.6 billion), up 27% on Q1 2011. The weighted European office yield remains unchanged at 5.27%, with movements in only two markets: Yields moved up by 50bps in Budapest as investor confidence declined over the economic outlook whereas strong investor demand for core product in Hamburg led to 10bps compression.
Chris Staveley, Head of EMEA Office and Industrial Capital Markets, Jones Lang LaSalle added, “When compared with Q1 2011 capital values have increased by 3.8%, which, along with stability in yields and demand represents steady progress. Any growth we see across Europe will be driven by rental increases in sought after prime buildings as interest in secondary product continues to remain weak.”
